Mortgage Giants Moving Toward Alternative Credit Scoring

What Happened?

Fannie Mae and Freddie Mac are preparing to expand how creditworthiness is measured in the mortgage market by allowing newer credit scoring models that incorporate alternative data. These models, including updated versions of FICO and VantageScore, go beyond traditional credit histories and will factor in payments like rent, utilities, and telecommunications.

The change is intended to address a longstanding complaint with the system. Millions of Americans have either no credit history or a thin one, making it difficult to obtain a reliable score under current models. Under current models, consistent on-time payments for rent and utility bills don’t count toward mortgage eligibility, despite reflecting regular, and often positive, financial behavior.

A major driver behind this change is the increasing availability of digital payment data. As rent and other recurring expenses move online, they can be tracked and reported more easily, enabling lenders to evaluate borrowers using a wider set of financial activities.

Why It Matters

Moving forward, the meaning of ‘creditworthy’ will change in practice. Traditional scoring models are built around borrowing and repayment, particularly credit cards and loans. That structure excludes people who avoid debt or rely primarily on cash and debit, even if they consistently meet their financial obligations.

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But by incorporating alternative data, these newer models are aiming to capture patterns previously unavailable to lenders. For example, a borrower who has paid rent on time for years but has limited credit card use could now appear less risky than before. That could expand access to mortgages without changing underlying lending standards.

Lenders will need to update their systems, validate new models, and ensure compliance with the new underwriting rules. Since alternative data is not reported uniformly, there may be inconsistencies, leading to uneven results depending on how the data is collected and used.

How It Affects You

For borrowers with a limited credit history, this could positively affect what counts in an application. Right now, someone can pay rent on time for years and still look risky on paper because they haven’t used traditional credit products.

If rent and similar payments are consistently captured, lenders can start to see patterns that were previously ignored, like stability over time rather than just borrowing activity. While that doesn’t guarantee approval, it can change how borderline applications are evaluated.

The current limitations are in the data itself, as these models only work if payments are being recorded and reported in a usable way, which is still not standard across landlords and lenders. Two prospective borrowers with identical financial behavior could be treated vastly different depending on whether or not their payment history shows up under the current models. Adoption by lenders also matters, since not every institution will move at the same pace.

This is a big structural change. While the mortgage process itself isn’t changing, the definition of creditworthiness is being altered to include a much wider range of financial behavior, which could potentially bring millions of American borrowers into consideration.

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